Query No. 1

Hill Stone Cement Ltd. is an existing cement manufacturing company having 1400 hectares Mining Land. Subsequently 200 hectare land was considered by the Government as forest land to be acquisitioned by it. Because of better quality of limestone in this area company requested State Government to allow the company to retain the same for its mining purpose and allot another land to forest department in lieu of this land. The Government vide its another order has handed over 200 hectares land to the Forest Department through its land bank in lieu of this land. The company for this purpose has to make following payments to the Government:

1. Net Present Value: An amount of Rs. 20 crores @ Rs. 10 Lakhs per hectare for 200 hectare forest land. This amount is the maximum side of the value decided by Supreme Court between Rs. 5 Lakhs and Rs.10 Lakhs per hectare. This has been paid by making a request that if the calculation is done on actual basis as per the density of the forest, then the excess amount will be refunded to company, which means the final amount may be the same or even less.

Reply

The company is making additional payment for retaining 200 hectare land which has better quality of limestone in the said area. The payment so made is for retaining the land which is otherwise to be acquired. The payment so made is the additional cost to the company for retaining the existing land and therefore the expenditure so incurred is the capital expenditure and will be debited to the land account. If any refund is received subsequently, the same shall be credited to land account.

2. Compensatory Afforestation Expenses: An amount of Rs. 100 Lakhs towards compensatory afforestation expenses, which has been incurred by State Government for plantation of another 200 hectares land given by the State Government through its land bank.

Reply

The compensatory afforestation expenses is a revenue expenditure since the company does not get any interest in any property and there is no enduring benefit from the said expenditure. The said expenditure is allowable u/s. 37 [CIT vs. Associated Cement Co. Ltd. 172 ITR 257 (SC) / Shri Venkata Satyanarayana Rice Mill Contractor Co. vs. CIT 223 ITR 101 (SC)].

3. Development & Reproduction of Safety Zone: An amount of Rs. 10 Lakhs to prepare a safety zone between the forest land and mining land boundary.

Reply

The expenditure incurred on safety zone boundary is capital expenditure since the company gets enduring benefit.

The company seeks opinion about treatment of above payments under the Income-tax Act, 1961.

Query No. 2

Mr. Derivative is engaged in the manufacturing of steel pipes. During the assessment year 2005-06, it declared a profit of Rs. 1.50 crores from his manufacturing unit. In this year, he also started dealing in NIFTY (F&O) & Shares (F&O). On these dealings, assessee incurred a loss of Rs. 1 crore. The assessee claimed this loss against the business income from his manufacturing and filed his return of income at Rs. 50 lakhs.

The AO treated the loss so incurred as speculative loss u/s 43(5) by rejecting the following contentions of the assessee:

• NIFTY (F&O), which derives its value from the prices or index of price of underlying security, has no physical form in itself. It is only an intangible right. It is neither transferable nor its delivery can be affected. The transaction in Nifty (F&O) or for that matter in any future and option dealing in shares/stock are therefore outside the definition of speculative transaction under section 43(5).

Reply

The contention of the assessee is right. F&O transaction and dealing in derivative business is a separate kind of transaction which does not involve any purchase and sale of shares. Loss arising out of derivative trading cannot therefore be treated as speculative loss [DCIT vs. SSKI Investors P. Ltd. 113 TTJ 511 (Mum)].

• The transactions in ‘future & option’ are normal business transaction which is evident from the insertion of the clause (d) in section 43(5) w.e.f. 1-4-2006. The provision so introduced needs to be considered as explanatory in nature and should be given retrospective effect from the date the concept of derivatives is introduced in the Securities Contracts (Regulation) Act, 1956.

Reply

It should be noted that sec. 43(5) is amended with effect from A.Y. 2006-07 whereby it is specifically provided that dealing in derivative business is not a speculative business. This amendment though not retrospective is of a clarificatory nature and therefore it is applicable to assessment year prior to A.Y. 2006-07.

• As per provisions of section 73, speculative loss can be adjusted only against speculative profit. If clause (d) to section 43(5) is considered as prospective amendment and transaction in derivatives as ‘speculative’, then the losses in derivative prior to amendment would be taken as speculative loss and profit after amendment as business income. This would negate the adjustment of loss in derivative prior to A. Y. 2006-07 from the profit in derivative in A. Y. 2006-07 and subsequently. This would result in hardship and double jeopardy inasmuch as the earlier losses in derivative would not be available for set off against the subsequent profit in derivate. This position can be reconciled only if insertion of clause (d) to section 43(5) is taken to be clarifying the law as it always exists. Hence on a harmonious interpretation of law, the derivative transaction can’t be considered as speculative transaction.

Reply

On a harmonious interpretation of law, the derivative transaction can’t be considered as speculative transaction. It is stated in reply to first issue that the loss arising from derivative business is a business loss and therefore it can be set off against the profit of any other business.

Whether contention of the Mr. Derivative is tenable in law.

Query No. 3

M/s. Ozone Ltd. is engaged in the manufacturing of Air Conditioners. It has two manufacturing unit viz. Unit I and Unit II. Unit II is eligible for deduction u/s 80-IA. The results declared by the company for A. Y. 2006-07 are as under:

	Unit I	Unit II
Profit / (Loss) before Depreciation	100 Lakhs	(30 Lakhs)
Depreciation	30 Lakhs	20 Lakhs
Profit after Depreciation	70 Lakhs	(50 Lakhs)

The company filed the return for A. Y. 2006-07 at income of Rs. 20 Lakhs after adjusting the loss suffered in Unit II.

For the A. Y. 2007-08, the company has declared following results:

	Unit I	Unit II
Profit / (Loss) before Depreciation	150 Lakhs	100 Lakhs
Depreciation	25 Lakhs	15 Lakhs
Profit after Depreciation	125 Lakhs	85 Lakhs

The company claimed deduction u/s 80-IA in respect of Unit II at the rate of 100% of Rs. 85 Lakhs and filed the return at income of Rs. 125 Lakhs. The A O, however, is of the view that in terms of section 80-IA(5), the income of Unit II should be computed independently and therefore after adjusting the unabsorbed depreciation loss of Rs. 50 Lakhs, the income eligible for deduction u/s 80-IA would be only Rs. 35 Lakhs. Accordingly, he assessed the income of the assessee at Rs. 175 (125 + 85 – 35) Lakhs.

Whether action of the A. O. is correct and as per law.

Reply

The action of the AO is correct as per law. Section 80-IA(5) clearly provides that the profit of eligible business shall be computed as if such eligible business were the only source of income.

Query No. 4

Mr. Fortunate inherited a property as per will of his father on 30-4-2007 on death of his father. The father acquired this property prior to 1-4-1981. The fair market value of the property as on 1-4-1981 is Rs. 5 Lakhs. Mr. Fortunate sold this property on 31-12-2007 for Rs. 50 Lakhs.

Mr. Fortunate has approached to work out his capital gain tax liability particularly whether the capital tax gain liability would be on long-term capital gain and benefit of indexation would be available to him from 1-4-1981 or not.

Reply

Section 49(1) provides that where the capital asset becomes the property of the assessee by virtue of succession or inheritance as provided in sub-section (iii)(a), the cost of acquisition of the assets shall be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be. In the present case, Mr. Fortunate inherited the property from his father who acquired the property prior to 1-4-1981, therefore the fair market value of Rs. 5 lakhs as on 1-4-1981 shall be adopted as cost of acquisition and the same will be indexed for the purpose of computing long term capital gain.

Query No. 5

Diwali Co. Ltd. submits you the following information for the year ended 31-3-2007

Net Profits as per Profit & Loss A/c	Rs. 15,00,000/-
Excise Duty debited to P & L A/c but not paid upto 31.10.2007	Rs. 3,00,000/-
Purchases made in cash in violation of section 40A(3)	Rs. 4,00,000/-

Purchases from directors Rs 4 Lakhs but the market rate of the goods purchased is Rs 3 lakhs. The payment was made fully in cash (excluding the above said payment)

Commission paid during the year Rs. 5,00,000/-

No tax was deducted on commission payments amounting to Rs. 2 lakhs. The tax was deducted and remitted only in August, 2007.

Contracts payment made during the year Rs 3 lakhs. The company has not deducted tax at source u/s 194C for the entire amount.

The company is eligible for section 80-IA deduction @ 100% of the profits.

Advise the company on the tax consequences for violating various provisions of the law.

Reply

The excise duty of Rs. 3,00,000 is not paid upto 31-10-2007; i.e., before due date of filing of the return. The same shall be disallowed u/s. 43B.

Up to A.Y. 2007-08, 20% of amount of expenditure incurred in cash shall be disallowed. In the present case, the purchases of Rs. 4 lakhs are made in cash, therefore Rs. 80,000/- i.e., 20% of Rs. 4 lakhs shall be disallowed. The disallowance is to be made @ 20% irrespective of the fact whether the purchases are made from directors or from anybody else or at the rate higher than the market rate. Even in second case, 20% of Rs. 4 lakhs shall be disallowed; i.e., Rs. 80,000.

Note

100% expenditure shall be disallowed, if it is incurred in cash from A.Y. 2008-09.

The commission of Rs. 5,00,000 is paid but the tax deducted of Rs. 2,00,000 is paid by August 2007. The commission amount of Rs. 5,00,000 is disallowable by virtue of provision of sec. 40A(1)(a). However, if the tax deducted during the month of March is paid in August 2007 then the amount of commission on which tax is deducted during the month of March, 2007 shall not be disallowed by virtue of the amendment made by Finance Act, 2008 with retrospective effect since tax so deducted is paid in August, 2007; i.e., before due date of filing of the return.

Similarly the contract payment of Rs. 3,00,000 shall be disallowed u/s. 40(A)(1)(a) since no tax is deducted and paid in time.